The Morning Ledger: Egypt Turmoil Hits Multinationals

News Editor

The Morning Ledger from CFO Journal cues up the most important news in corporate finance every weekday morning. Send us tips, suggestions and complaints: david.hall@wsj.com. Get The Morning Ledger emailed to you each weekday morning by clicking here. Follow us on Twitter @CFOJournal.

Caesars Entertainment has locked up its two casinos in the country, saying risks are so high that insurance to protect against losses is prohibitively expensive. And General Motors has closed its plant outside Cairo, which employs about 1,400 workers—the second idling in two months because of political unrest. Mondelez International is following steps similar to those it took in 2011, when protests toppled President Hosni Mubarak. “Managers gave clear instructions to all employees that whenever they sensed any danger to stay and work from home,” said Michael Mitchell, a company spokesman. “To get around the curfews, employees were allowed to work early.”

Since June, at least nine large U.S. companies have warned investors that the struggle for control of Egypt is hurting their earnings. PepsiCo, Marriott International and Halliburton were among those saying they are experiencing business disruptions in the country, Murphy and Willhite note. Praxair CFO James Sawyer told his staff recently, “Don’t even work on that [new-business proposal for Egypt] anymore because that is not going to get paid for.” He added that “the outlook for the Middle East today is not as good as I would have hoped it was maybe four or five years ago when we started getting into the Middle East.”

Overall, the financial impact on most multinationals is expected to be minor, but the turmoil could be devastating for Egypt’s economy. Trade and investment have deteriorated with the instability. Foreign direct investment has been falling since 2007, and in 2011 companies pulled almost $483 million out of the country.

THE DAY AHEAD:

We get more data on consumer confidence this morning. Economists expect the preliminary August reading of the Thomson Reuters/University of Michigan index of consumer sentiment to rise to 85.5 after hitting a six-year high of 85.1 in July, Ahead of the Tape’s Spencer Jakab notes. And July housing starts are expected to increase from the 836,000 thousand in June.

Markets flash: It was a roller-coaster ride for Chinese shares thanks to an internal trading glitch at a local brokerage. Shanghai’s benchmark index surged as much as 5.6% and then dropped, ending down 0.7%. In contrast, European shares and DJIA futures are flat.

EXCLUSIVE ON CFOJ:

Blackline to use Silver Lake cash to hire, grow.Blackline Systems has raised more than $200 million from private-equity firm Silver Lake, which will enable the software company to hire and expand into new markets. Though it never sought funding from outside investors before, Chief Executive Therese Tucker told Maxwell Murphy that in its earlier days, the 12-year-old company “almost starved to death a few times.” CFO Charles Best said securing the investment turned out to be relatively painless. “We had a lot of excitement from a lot of people.” They ultimately chose Silver Lake’s middle-market-technology division, Silver Lake Sumeru. BlackLine had sales of about $25 million last year and is on pace for about $40 million this year. Ms. Tucker said the company isn’t profitable by generally accepted accounting principles, because it spends all of its free cash on building the company, specifically in hiring more personnel to hone its software and develop new products. Blackline’s software is designed to replace spreadsheets and automate the process of closing the books at quarter’s end, for example by reconciling corporate accounts and bank statements.

CORPORATE NEWS:

Lackluster earnings stoke retailers’ gloom.Weak results from Wal-Mart and Macy’s are casting a pall over what had been a healthy outlook for consumer spending, writes the WSJ’s Shelly Banjo. Both retailers reported declining traffic, a worrying sign, and Macy’s said it would boost its marketing efforts to bring consumers back in. Kohl’s added to concerns about a weak back-to-school season yesterday when it said its fiscal Q2 profit fell 3.5% and lowered its earnings forecast for the full year. On the earnings conference call yesterday, Wal-Mart CFO Charles M. Holley Jr. said there was “a general reluctance of customers to spend on discretionary items right now.” And as the back-to-school season reaches its peak, some retailers aren’t sure they’ll see a big revival among shoppers, the NYT’s Stephanie Clifford writes. “The expectations through the end of the year are really through the lens of the cautious consumer,” Mr. Holley said.

Dell profit drops. Dell posted a 72% drop in net income for its fiscal second quarter, while revenue was essentially flat. The WSJ’s Shira Ovide writes that the results reflect a one-two punch of a sagging market for PCs and a deliberate strategy to sacrifice earnings for market share. Dell is cutting prices on PCs and server systems it sells to companies to land new customers that may buy more profitable software and support services down the road. The poor results may bolster the case of parties, including CEO Michael Dell, who want to take the company private. But opponents, including Carl Icahn, have said Dell is playing up its financial weaknesses to justify what they say is Mr. Dell’s lowball offer for the company. “As we have adjusted our pricing, margins have declined, but we continue to make key strategic investments, and we are tightly managing our discretionary operating expenses,” CFO Brian Gladden said in prepared remarks.

Former Vitesse CFO pleads guilty to falsifying records. Two former executives of Vitesse Semiconductor pleaded guilty to charges of conspiring to destroy, alter or falsify records with the intent of obstructing an SEC investigation, the Department of Justice said. Vitesse founder and former CEO Louis Tomasetta and former CFO Eugene Hovanec pleaded guilty to fabricating and altering records regarding the company’s April 2001 and October 2001 stock-option grants, the WSJ reports. The count both men pleaded guilty to carries a maximum sentence of five years in prison and a maximum fine of $250,000. Jurors had twice previously failed to reach a verdict in the case, most recently in 2012. Another former Vitesse CFO, Yatin Mody, pleaded guilty in 2010 to charges of securities fraud. Mr. Mody awaits sentencing.

ECONOMY:

Fed could hedge end of bond-buying program. The Fed could hedge its bets by making small moves rather than large, aggressive ones when it starts pulling back on its $85 billion-a-month bond-buying program, said James Bullard, president of the Federal Reserve Bank of St. Louis. Mr. Bullard said he hasn’t decided whether the Fed should begin pulling back in September. But his comments were notable because they were the first by a central-bank official on the tactics the Fed might employ when it does begin to wind down the bond purchases, the Journal’s Victoria McGrane writes. “A larger move would be interpreted as a faster pace of reduction,” Mr. Bullard said. “A smaller move would be considered a more hedged bet, a slower rate of reduction in purchases.”

REGULATION:

Risky investments draw scrutiny from regulators. Individual investors are pouring tens of billions of dollars into a new generation of complex investment products, and regulators are raising concerns that not all buyers understand the costs and risks, writes the WSJ’s James Sterngold. Some state securities regulators are focusing their examinations on alternative-product brokers, while officials at the Financial Industry Regulatory Authority say they’re planning to file civil enforcement actions by year-end. “With these things, it can be like giving a 6-year-old a circular saw,” said Brad Bennett, Finra’s enforcement chief. Most mom-and-pop investors “don’t understand the risks they’re taking.”

New laws in India aim to tackle corporate fraud. Sweeping legislation in India aims to reform auditing practices, with stiffer penalties for fraud and more government oversight of businesses, the DealBook’s Jen Swanson reports. The Companies Bill sets tough sanctions for embezzlement, including mandatory jail time and hefty fines. To prevent additional cases like that of Satyam—in which Indian auditors failed to notice discrepancies despite auditing the company for years—the measure calls for the mandatory rotation of auditors and their firms. Businesses say problems are rife in corporate India. In a 2012 report by KPMG, more than half of respondents reported that their companies had experienced fraud or theft in the previous two years. Most of the respondents said they consider fraud an inevitable cost of doing business in this country, and many Indian companies were setting aside a portion of their turnover to offset anticipated losses.

THE WEEKEND READER

Every Friday we select a handful of in-depth articles we think are worth a bit of your valuable weekend time, either because they peel back the layers on a compelling business story, or somehow make us look at business in a different light.

Jeff Bezos, risk-averse rebel. Time’s Rick Wartzman puts on his Peter Drucker-shaded glasses and finds much to like about Amazon.com’s Jeff Bezos. “He is someone with a keen understanding of an essential Drucker insight,” Wartzman writes. Rather than bet the company on one idea and—in Mr. Drucker’s words—“rush around in the frenzy and busyness which very bright people so often confuse with ‘creativity,’” Mr. Bezos has taken a long-term, almost risk-free approach; methodically and deliberately tending to the innovation process, with some ideas—the Kindle, Amazon Web Services, e-commerce domination—taking off. For Mr. Drucker, it’s “the plodder” who “puts one foot in front of the other” who represents the true innovator. “Here’s the part that tends to get missed: if an organization does so [innovates]—constantly and without hesitation—it ultimately reduces its risk,” Wartzman adds. Now Mr. Bezos will take that approach to the Washington Post, his latest acquisition and, coincidentally, Peter Drucker’s one-time employer.

The business habits of highly effective terrorists. “What is true for Walmart is true for al Qaeda,” says Jacob N. Shapiro in Foreign Affairs. Terrorist organizations place much value in bureaucracy to keep tabs on costs and coordinate activities among cells. As in legitimate organizations, much bureaucratic effort is devoted to human resources—terrorists, by nature, have an issue with authority, even their own bosses. Without recourse to legal procedures—terrorism is illegal, FYI—such organizations can place a greater premium on bureaucracy than even your local city government. Top terrorists, like current al Qaeda No. 1 Ayman al-Zawahiri, are also top micro-managers. Shapiro shares an intercepted communiqué of Zawahiri castigating an underling for buying a new fax machine. And therein lies the terrorist organization’s weakness. All this bureaucracy requires communication—phone calls, emails, Excel spreadsheets—that create opportunities for intelligence agencies. “In that way, Zawahiri’s failures are not just a reflection of his personal weaknesses but a case study in the inherent limits that all terror groups face,” writes Mr. Shapiro.

Bullish on digital: McKinsey global survey results. A new McKinsey survey finds increased executive engagement in their company’s digital strategies. Over half the respondents said that CEOs sponsored or were directly engaged in digital-business initiatives such as Big Data analytics, automation or digital engagement with customers. A nine-point jump from last year’s survey, “this growth illustrates the importance of these new digital programs to corporate performance,” McKinsey writes. On the flip side, 32% of the respondents ranked senior management involvement as the top defining factor for a project’s success. Technology infrastructure and tech talent were seen as far less important. Granted, a survey directed at executives may result in a little horn-tooting. But that can’t overshadow what McKinsey identifies as a “bullish” attitude among executives for digital business. The executives tell McKinsey they expect to spend more on digital programs relative to last year’s results. “CEOs are more positive than executives in any other role, with more than one in five saying they expect income from digital to increase by more than 30% in three years’ time,” McKinsey writes.

CFO MOVES:

Roofing Supply Group, a Dallas-based wholesale distributor of roofing supplies, has appointed Shaun Mara as its chief financial officer. He joins from Dean Foods, where he was chief financial officer. Roofing Supply Group is owned by Clayton, Dubilier & Rice LLC.

Bglobal, an energy consulting and services company based in the U.K., said Chief Financial Officer Nick Kennedy has been suspended pending an investigation of his conduct. A press release failed to elaborate, saying only that “further details will be provided in due course.”

Real estate industry veteran Diane Morefield, EVP and CFO of Strategic Hotels & Resorts, Inc., discusses the challenges she has undertaken throughout her career in both finance and operational roles and her management style. While viewing herself as a “conservative voice” in an industry known for risk-taking, she says it's important to take risks when it comes to building one's career.